Enron keeps the faith in midst of political uproar over Dabhol
International development is a type of high stakes gamble requiring large doses of foresight, research, business and cultural savvy, and, as Enron is quickly learning–faith.
Enron is keeping its faith in the face of uncertainty for its 2,015-MW project in Dabhol, India. The project, to be built in two phases, will cost an estimated (US)$2.6 billion, including construction of necessary infrastructure for the liquefied natural gas which will be the primary fuel. Enron originally held an 80-percent stake with General Electric and Bechtel each holding 10-percent equity shares. A source close to Enron recently indicated the company had sold another 20 percent to an undisclosed buyer, reducing Enron`s investment to 60 percent.
Enron Development Corp. (EDC) spent nearly three years negotiating the deal for the first phase, including a power purchase agreement and a successful search for financing. Construction of phase one is in full swing, with approximately 2,200 people employed. The (US)$920-million 695-MW plant will initially burn oil. It is scheduled to come on line in 1997. The 1,320-MW second stage is still being negotiated.
The current fracas is the result of a political change in India. The project was much discussed during the election campaign of the Hindu nationalist Shiv Sena alliance and the Bharatiya Janata Party, which became the ruling party in March, ending the Congress Party`s reign in Maharashtra, India`s top industrial state. The alliance said Dabhol and its electricity would be too expensive and hinted that the deal was corrupted. The alliance also said the Congress party was selling the state to foreign multinationals and promised a review of the entire project.
Negotiations for this project started in 1992 with the Congress Party requesting negotiated deals, which is one aspect the alliance is protesting. The alliance insists the project should have gone through a bidding process. The government has stated that negotiated deals were made in an attempt to “fast-track” the projects because the electricity is desperately needed.
Enron admits the project`s electricity will be more expensive than the average for Indian stations, but insists that the difference is due to infrastructure that must be assembled plus inflation, according to a recent report in London`s Financial Times. If infrastructure expenses are removed, the Dabhol project would provide the third-largest electricity of the eight current government-approved projects. Even with the infrastructure costs factored in, Dabhol is surpassed by one other project in power expense.
Rebecca Mark, EDC CEO, said Enron did include a premium because of the project`s risk. “Few other investors in 1992 would have considered India as an investment opportunity.”
Mark also adamantly denied allegations of corruption in the project, noting that more than 30 state and central government departments were involved and watching the deal through almost three years of negotiations.
The Dabhol project has emerged as a political hot potato–the Indian government is touring the United Kingdom and the United States seeking foreign investment while trying to throw out one of the pioneering international companies.
Ever-present protesters managed to slow the site down for a few days, but construction continues with 300 policemen standing guard.
Maharashtra is considered one of India`s top states for foreign investment, with a solvent government, strong work ethic, and available industry and financial services. It has approved more than (US)$1 billion in foreign investment in the past year, more than any other state. The government, which faces elections in the spring of 1996, is calling to remove all international firms.
The government now has a lot at stake in this issue. Having painted Enron as a corrupt infiltrator, the government would lose face if it backed down now. However, the Dabhol project has attracted plenty of international attention, and both banks and international firms interested in investing are watching closely.
Experts are expressing a variety of opinions on the projected outcome, but one likely scenario involves concessions from Enron to allow a win-win situation to emerge. The government would save face, and Enron would salvage its project. For now, however, all that can be done is wait.